A typical standard clause in a guarantee provides that if sums cannot be recovered from the principal debtor for whatever reason, the guarantor still remains liable.
In this case, the contract was for the construction and sale by the claimant of a yacht costing €38 million. The buyer of the yacht failed to pay the first instalment and the claimant terminated the contract. The claimant sought to rely on a clause in the contract which provided that upon lawful termination the claimant would be entitled to recover 20% of the contract price by way of liquidated damages as compensation for its estimated losses.
The claimant pursued the defendant under his personal guarantee and the defendant asserted that the clause entitling the claimant to 20% of the contract price was a penalty and therefore unenforceable. The guarantee itself contained a provision that the liability of the guarantor was "not to be impaired, diminished, discharged or released by reason or in consequence of ....... the irregularity, unenforceable or invalidity in whole or in part" of the principal contract. Accordingly the claimant argued that liabilities of the guarantor and the principal debtor were not co-extensive and the defendant was liable even if the principal debtor was not.
The Judge stated that should the clause be a penalty, the claimant would not be able to recover the sum due from the guarantor as the reason for it being irrecoverable from the principal debtor was ultimately based on public policy. Since a penalty clause does not bring into existence any obligation on the part of the debtor, there is no relevant liability covered by the guarantee and nothing in the guarantee upon which the protective provisions could operate.
Ultimately the Judge decided that the clause was not a penalty as it was not a deterrent and was commercially justifiable as providing a commercial balance between the parties on lawful termination by the claimant. The Judge also noted that both parties had the benefit of expert representation in the conclusion of the contract.
Although the Judge's comments on the effect of the co-extensive provision in the guarantee were obiter and not binding, the case demonstrates that there are potential limitations to such a clause and it may not always be possible to rely on this provision where the principal contract is not enforceable.
Azimut-Benetti SpA v Darrell Healey [2010] EWHC 2234
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